So You’re Thinking about Starting a Business? – Tax complexities can be confusing
Starting a new business is full of risk and hard work. Often the most complex part of the process is making sure all of the forms and reports are filed on time. Here are some ideas to make this part of your business run a little more smoothly.
Creating and running a small business in America can be a lot of hard work. It can also be rewarding. Unfortunately, doing the tax part of this correctly can be a real head-ache. Here are some tips.
Other reporting may be required depending on your type of business and your state and local requirements.
- Start-up expenses. Keep track of expenses prior to starting your business. Even without revenue, these costs can be deducted using the IRS start-up rules.
- Register your business. This includes setting up a legal business entity (sole- proprietor, S-Corp, C-Corp, LLC or Partnership), filing for permits at the state level, filing for an EIN (employer identification number) at the federal level and any business entity registrations required at the federal level.
- Keep separate accounts. One of the biggest mistakes made by budding new businesses is combining personal with business expenses. The IRS is quick to make all expenses personal, non-deductible expenses when this happens. Having a separate checking account and a credit card for your business are good ideas.
- Ordinary and necessary. These two words are key terms in determining if your expenses are deductible as business expenses for tax purposes.
- Ordinary: An ordinary expense is one that is common and accepted in your trade or business.
- Necessary: A necessary expense is one that is helpful and appropriate for your trade or business.
- Know the additional filings required. Here are some of the key ongoing requirements:
- annual business filing
- payroll reports (monthly, quarterly, annually)
- monthly sales tax filings
- payroll tax deposits
- unemployment filings
- workman’s compensation filings
- quarterly estimated tax filings (as appropriate)
- annual tax returns and information returns (W-2s and 1099s)
- applicable business licenses/permits
- Create a calendar. Create a calendar to help you remember important filing dates. Online calendars with automatic reminders will help make the complexity of reporting easier to manage.
- Ask for help. You should focus on developing and growing your business. The hassle of keeping track of the paperwork and required filings is something that proper assistance can make easier.
The IRS understands the regulations on small businesses are complex and confusing. In their effort to help, they have created a set of resources. They can be found at: IRS small business resource center
Is a Roth IRA Right for You?
Roth IRA or Traditional IRA? The answer is never easy, but perhaps asking the right questions can make your decision easier.
Here are some thoughts:
For most taxpayers, you have until April 15th of the following year to contribute up to $5,500 ($6,500 if age 50 or over) into a Traditional IRA or a Roth IRA. Is an IRA an option worth considering for you? If so, which is better?
Traditional IRA
A Traditional IRA is an individual savings account that allows you to contribute money for your retirement. Depending on your income level, you may deduct the contributions from your taxable income. Any earnings made in a Traditional IRA account remain tax-deferred until the money is withdrawn from the account. Tax is only paid on the money once it is withdrawn. After the account holder reaches age 70 1/2 you may no longer make contributions into your Traditional IRA and minimum required distributions must be taken from the account each year. Anyone with earned income can create a Traditional IRA, but if you also have a retirement account with an employer, there are income limits to the amount you can contribute to your IRA in pre-tax dollars.
Roth IRA
A Roth IRA is an individual retirement account that allows you to contribute income that has already been taxed (“after-tax” dollars). Withdrawals of earnings on contributions from Roth IRA accounts are federal income tax-free so long as a 5-year holding period has been met and the account holder is at least 59 1/2 years old, disabled, or deceased. Withdrawals of contributions are always tax-free since you already paid the tax on the contributions. There are no required minimum distributions nor are there age limits for contributions. In 2013, individuals who earn more than $127,000 and married joint filers who earn more than $188,000 are ineligible to contribute to a Roth IRA.
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So the answer is. . .it all depends. If you think tax rates will be significantly higher when you withdraw your retirement savings, then think seriously about a Roth IRA.
If you think your retirement account investments will perform well, then perhaps the earnings growth in a Traditional IRA will more than pay for the additional tax at time of withdrawal.
Gone Phishing?
Unlike fishing, phishing has no limits and can hurt anyone it touches. As one of the top 12 IRS tax scams, you do not want to take this bait. Here is what you need to know.
Each year the IRS publishes the top dozen tax scams it encounters over the prior year. One of them that makes an all too common appearance on their list is the phishing scam. Here is what you need to know.
Phishing requires bait
Phishing is the act of creating a fake e-mail or website that looks like the real thing. This “bait” is then used to bring you into the scam by asking for private information. This includes your name, address, or phone number. It could also include potentially dangerous ID theft information like your social security number, a credit card number or banking information. The bait is often very real looking – just like correspondence from the IRS or the IRS web site.
How to avoid the lure
How do you know the phishing is fake? Here are some tips.
- The IRS never initiates contact via email. If you get an unsolicited e-mail from the IRS requesting a response, do not reply! Instead forward the email to: phishing@irs.gov
- Know the IRS or vendor web site. This includes the appearance, but more importantly the address. The valid address for the IRS is: www.irs.gov
- They may know some things. Good phishers already have parts of your identity, so just because they know things like your middle name and birth date does not make them legitimate.
- What about phone calls? Phishing over the phone is also a problem. If you receive an unsolicited phone call, get the person’s name and ID. Hang up. Then go to the IRS (or vendor) web site, take down their phone number and call them back using this phone number. Most fake calls are ended quickly when taking this approach.
- Don’t forget social media. Phishing can also happen via social media and texting. Virtually every digital resource has the potential to be used as a tool for theft.
What do phishers do?
When the phishers have your information, they can file false tax returns requesting refunds, steal bank information, set up fake credit cards, establish false IDs plus much more. Remember if it smells like a phish, it probably is.
Are You Maximizing Your Retirement Account Tax Benefit? – 2013 contribution limits
If you have not already done so, consider adjusting your retirment account
contributions to match the expanded annual limits that have increased for 2013.
Here are the new limits.
2013 marks a watershed year for contribution limit increases in many of the core retirement savings programs. Many of these contribution limit increases are established using a federal formula. While most annual limits stayed the same from 2011 to 2012, this is not the case for 2013. Here are current annual contribution limits for the more popular programs:
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Take action
If you have not already done so, please consider:
- reviewing and adjusting your periodic contributions to your retirement savings accounts to take advantage of the higher limits
- setting up new accounts for a spouse or dependent
- using this change as a chance to review the status of your retirement plan
- reviewing contributions to other tax-advantaged plans like Flexible Spending Accounts (health care and dependent care) and pre-paid medical savings plans like HSAs (Health Savings Accounts)
Audit Target: The Sole Proprietor
Often the #1 target of IRS audits, sole proprietors need to be prepared with good
records. Here are some tips.
Each year the IRS publishes their activities in a publication called the Data Book. And each year for the past number of years the number one target of audits are those tax returns with a Schedule C for small business activity. So how to prepare yourself for a possible audit? Here are some tips.
- Keep records separate. The quickest way to get a deduction for your business disallowed is to blend your personal bills with those from your business. Open a separate checking account and use a separate credit card for business expenses.
- Keep logs. Keep a logbook for business miles. Keep receipts for business meetings and meals. Include the date, time, subject, and who was present at the meeting.
- Ordinary and necessary. Two key words to use to qualify legitimate, deductible business expenses per the IRS are;
- Ordinary: an expense that is common and accepted in your industry.
- Necessary: an expense that is helpful and appropriate for your business.
- Business not hobby. A qualified business activity allows for direct deductibility of appropriate expenses, where-as hobby activity expenses are only allowed as a miscellaneous itemized deduction subject to passing a 2% adjusted gross income threshold. There are many facets here, but key among them is a profit motive and active participation in the activity to qualify your activity as a business.
Just because the IRS focuses their audit activities in this area does not mean you should be reluctant to take appropriate deductions. Just be prepared to defend your position with excellent records.
Don’t Forget Your Estimated Payment
With all the new tax changes taking place this year, it is more important than ever
to make quarterly estimated tax payments to avoid potential penalties.
The tax filing deadline is upon us. The sense of relief that another 1040 form is filed is like lifting a weight from your shoulders. But wait! April 15th is also the 1st quarter estimated tax due date for 2013! So how do you know if you need to place another check in the mail? Here are triggers that suggest you may wish to consider sending in a quarterly estimated tax payment.
- You needed to file quarterly estimated tax payments last year or your 2012 tax return required an additional tax payment in excess of $1,000.
- You receive income that does not have taxes withheld. Common sources of this type of income are Social Security Benefits, part-time jobs, and self-employment income.
- You have rental property, investment income, or interest income. In this case you may wish to consider calculating your estimated 2013 tax obligation to determine if estimated tax payments are required.
- New 2013 tax changes could impact your tax bill. If you and your spouse both work, the marriage penalty and additional taxes for middle and upper income households could impact the amount owed in 2013. Substantial tax increases typically will start to escalate after your household income reaches $200,000.
- Any life events in your near future? Remember certain events such as marriage, divorce, or the birth of a child can change your tax obligation up or down. Perhaps you expect earnings from a small business or investment to impact your taxable income during the year.
If you think you might owe estimated taxes remember to make payments each quarter by the 15th (or the following Monday if it falls on a weekend) during the months of April, June, September, and January. You are required to prepay 90% of next tax year’s bill or 100% of the prior year tax bill (110% if your adjusted gross income is over $150,000) to avoid underpayment penalties. If you do not, penalties for underpayment may apply to you in addition to the tax surprise facing you next April.
Still Time to Make IRA Contributions for 2012
Remember you have until April 15th to fund last year’s IRA contributions. Here is what
you need to know.
Remember you have until you file your tax return to make a contribution to a Traditional IRA or Roth IRA for the 2012 tax year. The annual contribution limit is $5,000 or $6,000 (if you are age 50 or over). Prior to making the contribution, if you (or your spouse) are an active participant in an employer’s qualified retirement plan, you will want to make sure your modified adjusted gross income (MAGI) does not exceed certain income thresholds. There are also MAGI (income) limits to qualify to make Roth IRA contributions. The limits are:
2012 IRA contribution limits
Contribution limit: $5,000 or $6,000 (with age 50+ catch up provision)
Income limits:
Note: Married Traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separate and either spouse participates in an employer’s qualified plan, the income phase-out to contribute is $0 – $10,000.
How does the phase-out work?
If the phase-rules apply to you and your income is below the “full contribution” amount noted above, you can contribute up to the maximum annual contribution. But what if your income falls between these ranges?
| 1. | First, subtract your income from the higher (phase-out complete) amount to get your contribution income potential. |
| 2. | Next calculate the phase out range. |
| 3. | Then, divide your contribution income potential by the phase-out range. |
| 4. | Take the result times your maximum annual contribution amount. |
| Example: Roth IRA contribution limit for a single person, age 40 with MAGI of $115,000; $10,000 contribution income potential (125,000-115,000); divided by phase-out range of $15,000 ($125,000 – 110,000); 10,000/15,000= .666 x $5,000 = $3,300 2012 ROTH IRA contribution limit. Rounding rules apply. | |
If it’s too late for you to make a 2012 contribution, it’s not too late to plan for 2013. Here are the limits for 2013.
2013 IRA contribution limits
Contribution limit: $5,500 or $6,500 (with age 50+ catch up provision)
Income limits:
Note: Married Traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separate and either spouse participates in an employer’s qualified plan, the income phase-out to contribute is $0 – $10,000.
A final thought: If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA. While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.
984,000 Could Lose their Tax Refund
Each year the IRS pulls back money for unclaimed refunds. The amounts are not
trivial, as the unclaimed refunds for 2009 are over $900 million. Here is what
you need to know.
Last week the IRS announced it is holding $917 million in unclaimed refunds for the 2009 tax year. If the claims for these unpaid refunds are not made by April 15th the refunds will no longer be available. Here is what you need to know:
- Timely filing. To receive the refund your 2009 tax return must be properly addressed, mailed, and postmarked by April 15th. It is best to send this certified mail in case there is a dispute with the filing of the return. To play it safe, it is also best to plan for the IRS to receive the return prior to April 15th.
- Haven’t filed a tax return? There is no penalty for filing a late return that qualifies for a refund.
- There may be delays. If you have not filed a 2010 or 2011 tax return, your refund may be granted, but delayed until the other tax returns are filed. In addition, the refund may be used to pay for any unpaid tax obligations.
- It will be tough. Remember all of the country is busy preparing 2012 tax returns, so getting help can be a challenge.
If this impacts you, act now. If you fail to file a tax return, the government can collect any taxes owed long after three years. However, if the government owes you money, you only have three years from the original tax filing due date to collect it. There are no exceptions to this time limit.
2014 Health Savings Account Limits Announced
If you are participating in an HSA, recently announce limits for 2014 will help you get a jump on planning for next year.
The savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2014. The new limits are outlined here with current year amounts noted for comparison purposes.
What is an HSA?
An HSA is a tax advantaged savings account where part of your wages can be contributed on a pre-tax basis. There is no tax on the funds contributed or the interest or investment earnings as long as the funds are used to pay for qualified medical, dental and vision expenses. To qualify for this tax-advantaged account you must be enrolled in a “high deductible” health insurance program as defined by HSA rules.
The limits
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Note: To qualify for an HSA you must have a qualified High Deductible Health Plan (HDHP). To qualify, a plan must meet minimum deductible requirements that are typically higher than traditional health insurance. In addition, your coverage must have reasonable out-of-pocket payment limits as set by the above noted maximums.
Not sure what an HSA is all about? Check with your employer. If they offer this option in their health care benefits, they will have information discussing the program and its potential benefits.
Triple Tax: aka The Lottery
Most everyone enjoys dreaming of winning it big in the lottery. News media outlets publicize the large unclaimed pots of money on the evening news and they put a spotlight on the lucky multi-million dollar winners. Ever wonder what the tax math looks like?
The bottom line when seen from a wage stand point is that 75% or more of the income used to play the lottery does not end up in the hands of the winner.